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Legally preparing for a sale – how it can affect valuation multiples? (Part 3 of 3)

See all articlesLegally preparing for a sale – how it can affect valuation multiples?
Selling a business
Sean O'Neill
Sean O'Neill
Managing Director
December 7, 2022
minute read

How to identify red flags for potential buyers

Most people would agree that they are so busy day to day running their business, that they have underinvested in certain systems, record keeping and policies.

Often, we take a small or medium sized company to market for a sale, and we discover that the company has not dotted the I’s and crossed the t's. Some examples:

  • Having council or regulatory permission for a certain volume – but the business has grown above this limit and should have updated their approvals.
  • Operating without the right permits or approvals.
  • Having written agreements with suppliers or customers but these are not signed or in email format (eg, purchase orders with the commercial terms but not the full terms and conditions).
  • Staff contracts being out of date and not reflecting current terms.

These gaps in the business happen more often than you think, and a business which isn’t well organised and cleanly presented can mean that a buyer will pay less for a business, given there is more risk associated with the business.

Some historical Nash examples:

  • The business had been operating for over 10 years and serving alcohol to guests in accordance with a liquor license but had grown larger over time and started to exceed the limits of their license. In this instance, the buyer took an additional 60 days to complete the transaction whilst they amended their license.
  • The business had been receiving payments from a customer per the terms of a 100 page contract for 3 years, however, the contract was not duly signed by both parties. In this instance, the buyer requested that a new contract be agreed and signed – the process took over 90 days.

Luckily Nash was able to identify the two issues above relatively early in the piece. We would characterise these as red flags to a buyer.

A red flag can only be negative and cause:

  • A lower number of bidders
  • A lower purchase price
  • A delayed sale timeline

All of the above affect multiple and therefore value. In some circumstances, this can cost $1m, in others up to $10m to the seller.

When a client engages Nash to sell their business, we undertake a deep dive into all operational and legal aspects of the business. We raise as many of these red flags early on so that we can address these before buyers become aware of them.

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